Baidu – Lower barriers

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Baidu removes barriers for Alibaba and Tencent.

• Hot on the heels of the spin off of iQiyi, Baidu has announced the spin off of Global DU as the next move in its quest to become a focused AI company.
• I suspect that other assets like Nuomi.com and its app stores are likely to follow, creating a pure play AI offering that could be used by Alibaba and Tencent without competitive conflicts.
• Global DU is Baidu’s operation to offer advertisements outside of China as well as tools and its apps: Du Caller, MoboJoy, Photo Wonder and DU recorder.
• These are assets that were created and developed when Baidu’s ambition was to become a complete Chinese Ecosystem building on its success in search.
• The idea was that users who start with a Baidu search would be enticed to use other Baidu services thereby enabling Baidu to gather more data and increase its addressable market.
• This is exactly Google’s strategy, but the ascendency of Alibaba and Tencent has pushed Baidu into a distant third place in the race to become a fully-fledged Chinese ecosystem.
• This combined with the problems it has had with fake advertisements appearing on its service has made it very difficult to compete against the two larger BATmen, causing the company to refocus on its core competence: AI.
• In China, Baidu is far and away the leader in AI and globally, RFM ranks Baidu as No.2 behind Google but meaningfully ahead of Microsoft, Apple, Amazon and so on.
• Furthermore, I think that there is very little chance of Google being able to use its AI in China as it remains currently blocked in China and the data set upon which its AI is trained is almost entirely non-Chinese.
• Even the best AI today is still basically pattern recognition meaning that predictions that are made are only valid as long as the historical data set upon which they were trained remains stable.
• Taking Western algorithms and running them in China is likely to end in disaster, even for Google, meaning that Baidu at home remains pretty much unchallenged.
• With its prior strategy, Baidu was competing directly with Alibaba and Tencent making it very unlikely that they would ever use its AI.
• The divestiture of all of these competing assets removes Baidu from the competitor list, paving the way, in my opinion, for Tencent and Alibaba to use Baidu’s AI.
• This is particularly relevant as RFM research has found that both Alibaba and Tencent are very weak when it comes to AI despite protestations and investments to the contrary.
• The end game here could be Baidu becoming an independent place to source AI in China (like ARM in processor designs) creating far more value than a third-rate ecosystem.
• Baidu shares is once again under pressure with the loss of its AI leader (Qi Lu) making it a good time to consider the shares as Baidu is almost certainly the cheapest AI investment available today.